OECD Reports Progress On Harmful Tax Regimes Work

Releasing a progress update, the OECD said international efforts to curb harmful tax practices and prevent the misuse of preferential tax regimes are having a tangible impact worldwide.

The latest progress report from the Inclusive Framework on BEPS covers the assessment of 53 preferential tax regimes. The OECD said the report demonstrates jurisdictions' continuing resolve to ensure that tax breaks are only offered to substantive activities, and only if they do not pose risks of harmful competition to others.

The assessment process is part of ongoing implementation of Action 5 under the OECD/G20 Base Erosion and Profit Shifting Project. The assessments are undertaken by the Forum on Harmful Tax Practices (FHTP), comprising of the more than 120 member jurisdictions of the Inclusive Framework.

Action 5 revamps the OECD's work on harmful tax practices with a focus on improving transparency, including compulsory spontaneous exchange on rulings related to preferential regimes, and on requiring substantial activity for preferential regimes, such as regimes that provide preferential income tax rates for intellectual property income.

The OECD reported that Andorra, Curacao, Hong Kong, Mauritius, San Marino, and Spain have taken legislative changes to abolish or amend a total of 18 regimes, and Aruba, Australia, Maldives, Mongolia, Montserrat, the Philippines, and Saint Lucia have committed to make legislative changes or abolish a further 10 regimes.

In addition, the OECD reported that Lithuania, Mauritius, and San Marino have designed four new or replacement regimes that meet the Action 5 standard. Since the last update, 17 regimes have been brought into the FHTP review process, in Aruba, Brunei Darussalam, Curacao, Gabon, Greece, Jordan, Kazakhstan, Malaysia, Panama, Paraguay, Saint Kitts and Nevis, and the United States.

So far, as a result of the BEPS project, 246 regimes have been reviewed. Of these 78 are in the process of being eliminated or amended, and 46 have been amended or abolished. 23 were found to be out of scope, and 53 were found to be not harmful.

The OECD said: "These results indicate the extent of continuing work to end harmful tax practices, and ensures that in the future all preferential regimes require real substance."

The OECD has further announced that, "given that all preferential regimes for geographically mobile income must now meet the Substantial Activities Requirements, it is essential to ensure that business activity does not simply relocate to a zero tax jurisdiction in order to avoid the substance requirements."

It explained: "This would tilt the playing field for those that have now changed their preferential regimes to comply with the standard and jeopardize the progress made in Action 5 to date. Against this backdrop, the Inclusive framework has decided to apply the Substantial Activities Requirement for 'no or only nominal tax' jurisdictions."

Commenting, Pascal Saint Amans, director of the OECD Centre for Tax Policy and Administration, said: "This new global standard means that mobile business income can no longer be parked in a zero tax jurisdiction without the core business functions having been undertaken by the same business entity, or in the same location. The Inclusive Framework's actions will ensure that substantial activities must be performed in respect of the same types of mobile business activities, regardless of whether they take place in a preferential regime or in a no or only nominal tax jurisdiction."

The FHTP is to meet in January 2019 to assess continuing reviews on the remaining regimes for which commitments to amend or abolish were made in 2017. Further discussion on all other regimes will take place through the FHTP review process in 2019. The FHTP will also work on the next steps for assessing compliance with the global standard for no or only nominal tax jurisdictions, and continue to report results to the Inclusive Framework.

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